The Green Sheet Online Edition

November 25, 2013 • Issue 13:11:02

The competitive, diversified mobile wallet landscape

There's a new kid on the mobile payment block. Called Loop, it was unveiled recently amid much fanfare and talk of it being "the most accepted mobile wallet solution in the world." In a unique twist, the developers used the crowd-funding website Kickstarter to secure loan pledges of nearly $124,000 on a stated funding goal of $100,000 – and they raised the money in under 30 days.

Loop's founders are entrepreneurs with successes in both the mobile and payments arenas. Will Graylin has started five companies spanning both fields, including ROAM Data Inc., a mobile POS solutions provider that he sold to Ingenico, and WAY Systems Inc., which was sold eventually to VeriFone Inc.

George Wallner was the founder and Chief Executive Officer of terminal manufacturer Hypercom Corp., which was sold to VeriFone, as well. He was also an investor in Way Systems and ROAM Data. According to published reports, Wallner and Graylin have invested about $3 million of their own money in Loop, which is positioning to compete with the likes of Google Inc., Isis, MasterCard Worldwide, Merchant Customer Exchange (MCX), PayPal Inc. and Visa Inc.
Loop is designed to transcend technology hurdles to broad adoption of mobile payments. The Loop platform consists of a mobile wallet chip housed inside a fob or mobile device peripheral that consumers purchase and use to store information from payment and other cards. It offers merchants a turnkey marketing tool that helps them build and deliver specialized offers via customer smartphones.

What sets it apart from other mobile wallets is that Loop doesn't require merchants to make changes to their hardware or software. Using a patented technology called Magnetic Secure Transmission, the Loop wallet communicates directly with mag stripe readers at merchant checkouts, effectively fooling the readers into operating as though mag stripe cards were being swiped.

Loop aims to supplant the prevailing technologies underlying mobile wallets: near field communication (NFC) and bar codes. NFC has struggled to gain traction, despite being favored by major mobile wallet initiatives. One reason is that merchants must make hardware and software changes to work with NFC. Another is a lack of technology support from mobile carriers and for Apple Inc. iPhones.

The consultancy Aite Group LLC expects NFC-based wallets to take off soon as retailers make a mad rush to upgrade to contactless POS terminals. This optimism may be warranted, considering the three leading mobile companies serving the United States – AT&T Mobility, T-Mobile USA and Verizon Wireless – have launched the NFC-enabled mobile wallet Isis.

Isis, which took more than two years to build, was officially rolled out Nov. 14, 2013. Customers of the three carriers can choose from more than 40 Isis-ready smartphones and can download the Isis wallet for free from Google Play. There they can gain access to numerous marketing and loyalty/rewards programs. Toys "R" Us Inc. and Jamba Juice Inc. stores will be among the first to accept payments from Isis wallets. To stoke consumer interest Isis loaded the wallets with hundreds of dollars in money-saving offers, like free Cokes and smoothies.
Isis is integrated with American Express Serve, a prepaid card account American Express Co. markets to underbanked consumers. JPMorgan Chase & Co. also signed on with Isis, offering the option to select cardholders.

"Isis is one of the few truly independent wallets that is not tied to a specific financial institution, merchant or online marketing scheme. This wallet-as-platform approach positions Isis to unify the consumer experience across the many developing mobile shopping environments," said Rick Oglesby, Senior Analyst at Aite.

Neither Loop nor Isis is apt to be the last mobile wallet alternative to seek market share. "We're still very much in the early stages of technology development in the mobile payments space," said Michael Misasi, Senior Analyst for Mercator Advisory Group.

Also jockeying for position is MCX. Formed by a group of merchants, MCX hired digital security company Gemalto in early 2013 to create mobile wallet software that supports loyalty and customized marketing in addition to payments. FIS, a leading provider of banking and payment technologies, was hired to process, route and settle mobile transactions initiated through MCX. MCX's founding members are several large retail chains, which together operate 75,000 stores that ring up more than $1 trillion in sales each year. Among them are Wal-Mart Stores Inc., 7-Eleven Inc., Publix Supermarkets Inc., Sunoco Inc., Target Corp. and HMSHost.

Many unknowns remain

Broad-based acceptance is critical to the evolution of mobile wallets. "You can't have a discussion about mobile payment technology without eventually winding up in a 'chicken and egg' debate, where consumers are the chicken and retailers are the egg," said April Schmaltz, Vice President of Marketing at TMG Financial Services. "Consumers won't demand a payment technology unless it's accepted by their favorite retailers," she said, adding that on the other hand, "retailers won't invest in a payment technology unless consumers demand it."

TMG, a card issuing agent for credit unions, supports MasterPass, a "digital wallet" from MasterCard. MasterPass uses NFC, and supports online as well as in-person and mobile payments tied to credit and debit card accounts. It also provides merchants with sophisticated mobile marketing tools. Schmaltz said the rollout of MasterPass to about 70,000 member cardholders was timed to coincide with the 2013 holiday season, when e-commerce and mobile sales to U.S. consumers are expected to set records.

TMG opted to tie its mobile payment strategy to MasterCard because it "has brand recognition and consumer trust to propel their solution to market-leader position [and it is] simple for retailers to deploy and consumers to sign up," Schmaltz said. MasterCard is also working on several fronts to grow acceptance. "One new project includes a button on its mobile app that will give users the choice between NFC or QR [quick response] codes to make a payment," Schmaltz said.

QR codes are two-dimensional bar codes that can be generated and presented on mobile device screens and can be read by most POS scanners. Considered marginal just a few years ago, QR codes have been gaining traction as a means of facilitating mobile payments. MCX said its mobile wallet is being designed to read QR codes.

Most recently PayPal added its name to the growing list of payment companies adding QR functionality to support mobile wallets. The Wall Street Journal reported in November 2013 that PayPal customers will soon be able to download a mobile app that generates QR codes to initiate payments at brick-and-mortar locations.

The report came on the heels of news that PayPal's parent company, eBay Inc., had purchased Braintree, a payment and marketing platform for online and mobile-only startups, for $800 million. PayPal has made no secret of its desire to expand its brick-and-mortar presence; it is said to have commitments from several large retail chains to download software necessary to accept mobile PayPal payments.

Driving mobile adoption

Pradeep Moudgal, Director of the Emerging Technologies Advisory Group at Mercator, has observed a huge and growing demand for robust mobile solutions. "I see an evolution of mobile where it becomes more of a marketing engine than a vehicle for payments," he said. One reason is the superior analytics mobile offers. "It's like data analytics on steroids," he added.

Misasi pointed out that merchants want mobile wallet solutions that do more than mimic credit and debit cards. "They want support for rewards programs," he said, adding that they also want good data security.
"The number of ways that retailers can engage with their customers is increasing, and mobile payment is playing a big part in this," said Dan Wagner, CEO of Powa Technologies. A U.K.-based startup, Powa has developed a card processing dongle that operates through a smartphone audio jack, like Square.

Tal Zvi Nathanel, co-founder and U.S. CEO of MyCheck, agrees that robust solutions will drive mobile wallet adoption. "We need to create value," he said. "We need to make things easier for merchants and consumers. Then, and only then, can this [mobile] market take off."

MyCheck combines low-cost marketing and feature-rich payment applications, like pre-ordering and splitting checks among diners, in a mobile app. "We're more about the experience," Nathanel said, pointing to successful runs of MyCheck in Israel and Europe. He expects similar success in New York, where MyCheck was launched recently.

Consumers sign-up for and download a MyCheck app for their mobile devices. When they wish to dine out they open the app and choose from a list of participating restaurants; they can even pre-order meals. Checks are then presented and paid using mobile devices, with payments posted to card and PayPal accounts. Nathanel described MyCheck as convenient for consumers and merchants. It also reduces merchant costs and promotes loyalty, he noted.

Nebo Djurdjevic, CEO of Cardis International, believes the best opportunities for driving mobile adoption are with businesses that have low-value sales. Noting that 86 percent of purchases for amounts under $10 in the United States today are paid with cash, he said current pricing models need to adapt to new market realities.

"We're using 40-year-old network architecture, designed for $100 transactions, and now we're hitting the limitations," Djurdjevic said. He doesn't believe changing the interchange fee structure will help either. "Mobile solutions that are cost effective will be welcomed by merchants who will then provide incentives to drive consumer acceptance," he said. "Merchants are in the best position to influence consumer behavior."

Cardis developed an aggregation technology that slashes processing costs for mobile payments by combining multiple small-dollar purchases at various merchants into a single payment transaction that gets cleared through the automated clearing house, a low-cost electronic network.

Headquartered in London, Cardis recently entered the U.S. market, partnering with mobile commerce solution provider Spindle Inc., which is deploying the platform to support unattended vending and cafeteria clients. Spindle developed the MeNetwork360 mobile wallet, which is used by an estimated 300,000 consumers and accepted by about 6,000 merchants.

In October 2013, Spindle heralded a deal with vending machine manufacturer Multi-max to integrate the MyNetwork360 technology with Multi-max's K-Cup line of vending machines. Cardis is also working to support interoperability with other mobile wallet providers, Djurdjevic said.

And the winners are?

Amid a flurry of activity, no real winners have emerged yet among mobile wallet schemes. "Everybody is looking for a game changer," Nathanel said. "It's very unlikely there will be a hardware game changer."

Today the most successful mobile program is run by Starbucks Coffee Co., which uses the Square mobile wallet app. The smartphone app displays bar codes that can be read by Starbucks POS devices. According to Berg Insight, U.S. smartphone users purchased $500 million worth of products and services with those devices last year, and most of those transactions were rung up at Starbucks, which boasts an average of 3 million mobile payments a week.

Mary Monahan, Director of Mobile at Javelin Strategy & Research, said the winners in the mobile wallet race will need scale. "Although it is undeniable that considerations beyond the user experience will shape the use of mobile wallets, the providers left standing as the space matures will need to capture consumer and merchant scale," she said, adding that it would be a "mistake to assume that consumer attraction to a particular technology," like QR codes or NFC, will determine which wallets gain universal acceptance.

Pricing will also be a critical factor. "Merchants are hoping the technology will provide a lower cost structure," Moudgal said. He also noted that merchants "need tools that can help them grow their businesses."

It's doubtful one, and only one, mobile wallet scheme will ever dominate. And in that way, mobile wallets may come to resemble traditional wallets. "We might end up with one or two that become universal wallets," providing universal acceptance, in addition to numerous private-label wallets like Starbucks, Misasi said. "In that way, the mobile landscape will end up looking a lot like the card landscape."

Do consumers trust mobile wallets?

Mobile wallets have been buoyed by significant hype over the past few years, but not much by actual adoption. Nearly every company with a stake in retail payments has one or more initiatives underway to drive mobile wallet adoption, with little success.

Michael Misasi, Senior Analyst at Mercator Advisory Group, believes one reason is that providers have been fixated on mobile apps that relieve consumers of the need for physical wallets. Industry consultant Paul Martaus agreed this is a problem. "Consumers do what consumers like to do," he said, adding that they're accustomed to pulling cards from their wallets. As for mobile wallets, he said, "consumers just don't think that way."

It seems many consumers may also be wary of using their mobile devices for payments. The British firm Consult Hyperion surveyed just over 1,000 U.S. consumers, asking which companies they trusted most to issue mobile wallets. Twenty percent said they'd trust their banks, and 10 percent said they trusted Google. Mobile providers and national retailers were trusted by 2 percent and 3 percent, respectively. However, 64 percent said they would never use mobile wallets.

"The survey shows that issuers need to do a better job of conveying what mobile wallets are and what benefits they bring," said Dave Birch, Consult Hyperion Associate Manager.

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